Market volatility: How long will the impact of BTC ETF last?

In 2024, Bitcoin started the new year on a roller coaster ride as 10 new spot ETFs began trading in the U.S. market. But the event was both chaotic and historic. During this period, Bitcoin prices hit multi-year highs and year-to-date lows. But there is no doubt that Bitcoin welcomes the power of traditional finance into its world.

summary

• The U.S. Securities and Exchange Commission approved the listing of ten new Bitcoin spot ETF products, capping off a historically chaotic week for Bitcoin investors.

• Bitcoin prices hit a multi-year high before falling to year-to-date lows, with an 18% market sell-off over the weekend driven by derivative leverage and spot profit-taking.

• Multiple indicators reached levels when they encountered major resistance in past cycles, and long-term investors sold about 75,000 bitcoins for profit.

In just two weeks, 2024 has proven to be a real roller coaster ride for Bitcoin investors. The U.S. Securities and Exchange Commission approved 10 Bitcoin spot ETF products to trade in the U.S. market, which can be said to be one of the most significant financial product listing events in history.

In many ways, Bitcoin has successfully pulled the traditional financial world and U.S. regulators into a notoriously chaotic and volatile world. On January 9, after the SEC’s social media account was hacked, the news about the ETF’s approval was a blunder—hackers posted a fake approval notice. The news caused the BTC price to soar to $47,200, but as the authoritative rumor was refuted, the Bitcoin price quickly fell back to $44,500.

The second mistake occurred on January 10, when the real SEC approval document was leaked from the SEC's official website before the US market closed. But in the end, all 10 ETF products were approved and began trading on January 11.

The price of Bitcoin hit a multi-year high as a result, reaching just under $48,800. But it then fell 18% over the weekend, falling to $40,000 when traditional markets were closed, a new low so far this year. Even so, Bitcoin once again welcomed Wall Street into its world.

Bitcoin spot ETF launched

In the first two days of trading, the spot ETF saw total volume of $7.823 billion, with inflows of over $1.4 billion in AUM. This exceeded the $579 million outflows from the currently trading GBTC ETF product, as investors reallocated their investments after years of investing due to the latter’s poor performance as a closed-end fund (ETF fees are 1.5% at most, down from 2.0%).

Despite these outflows, GBTC remains the biggest ETF on the exchange, with $4.166 billion in trading volume over the two trading days, accounting for about 57% of the total volume. It is likely that funds will continue to circulate and shuffle within GBTC in the coming weeks.

The absolute size of GBTC relative to other ETF products can be seen in the chart below. Despite the outflow of GBTC, their huge holding of 617,080 BTC still dwarfs their competitors, and the related liquidity conditions remain attractive for any traders and investors who are sensitive to market liquidity and depth.

After just two trading days, U.S. spot ETF products currently hold a total of 644,860 BTC (approximately $27.2 billion), accounting for 29.7% of global ETF holdings.

Overall, trading volume and AUM make this one of the largest and most significant ETF launches in history, an event that in many ways marks the end of the beginning of Bitcoin’s maturation and growth phase.

A news hype event?

Whether it’s the halving, the launch of an ETF, or the arrival of yet another Thursday, Bitcoin investors love to debate how these events are “priced in by the market.” Despite major swings along the way, the Bitcoin price remains roughly flat year-to-date, suggesting this particular event is priced to perfection.

Of course, there are key drivers behind medium-term volatility, with open interest (OI) in both futures and options markets rising significantly since mid-October:

• BTC futures OI (yellow) increased by $7 billion (+66%), with $1.1 billion flushed out of the market this week.

• BTC options OI (blue) increased by $6.6 billion (+70%), with $2.3 billion in cash realized this week from contract expirations and liquidations.

We still need to note that open interest in both markets remains near multi-year highs, which suggests leverage has increased and is becoming a more dominant force in the market.

The chart below shows an oscillator of futures open interest percentage changes. This tool can be used to spot periods of rapid changes in overall market leverage.

• (Red) High values ​​indicate an increase of +2 standard deviations in OI.

• (Blue) Low values ​​indicate a decrease in OI by -2 standard deviations.

We can see that a major deleveraging event occurred on January 3rd, with nearly $1.5 billion in OI liquidated in a single day. Conversely, OI increased significantly between January 9th and 11th as ETF speculation peaked, with prices approaching $49,000.

As new owners of the ETF shares entered Bitcoin’s 24/7 trading environment, over the weekend, a sell-off caused the OI price to drop to $40,000.

Perpetual funding rates have also maintained a strong positive bias, which currently indicates that leveraged traders are net long and are sometimes paying shorts over 50% annualized returns. We can also see a clear phase shift that occurred in mid-October, which shows that funding rates have shifted from a structure that oscillates around the midpoint to a persistently positive value.

The money market interest rate cooled down this week, but remained positive overall.

Options implied volatility has also reversed since mid-October, with the metric surging during this week’s chaos, having fallen for years since May 2021 as investor interest waned during the bear market. It’s also worth noting that options market infrastructure, liquidity, and depth have clearly matured in 2023, with open interest now on par with futures markets.

This downward trend in the option implied volatility (IV) indicator appears to have reversed in the short term, more than tripling since its low of around 30% in October to over 97% this week. As spot ETF products open new doors for institutional and retail capital, Bitcoin's volatility will likely begin to evolve as well.

Long-term holders and new traders

It is common for long-dormant Bitcoin holders to react during major market events. This includes periods when the market breaks out to new all-time highs, around cycle tops and bottoms, and during times when there are major shifts in market structure (e.g. Mt Gox, halvings, and now the launch of spot ETFs).

The extent of unrealized gains and losses held by these long-term investors can be measured by the LTH-NUPL indicator. This indicator reached 0.55 this week, which is a meaningful positive number, meaning that the average unrealized profit of long-term investors reached 55%. This is also the level of meaningful resistance that Bitcoin bulls encountered in previous cycles.

Currently, supply from long-term investors is also slightly below its all-time high, having decreased by about 75,000 BTC since November as more dormant Bitcoins are used to take profits.

While 75,000 BTC is a meaningful number, it should also be viewed in the context of total long holder supply, which accounts for 76.3% of circulating supply. As the above spending is happening, the corresponding metric, short holder supply, is only just beginning to rise from historical lows.

That being said, these payouts from veteran traders are statistically significant and result in a 1 standard deviation increase in restored supply (spending Bitcoin that has been dormant for more than a year).

As shown in the chart below, while such events are relatively rare, their occurrence often coincides with situations where an uptrending market encounters meaningful resistance.

As these long-dormant “old bitcoins” are re-entered into liquid markets, they have facilitated the largest profit-taking event since the all-time high in November 2021. During this cycle, the peak realized profit occurred on January 4, locking in more than $1.3 billion in profits per day as these bitcoins changed hands at a higher basis cost.

Profit taking is normal in an uptrend market, the real question is whether the emerging demand is sufficient to absorb all the profit taking.

Summarize

The events of the past week have been historic in both the literal and figurative sense. These new spot Bitcoin ETFs have set new records in terms of size, and a decade of industry effort has finally come to fruition. This means that after more than a decade of work, and in the face of significant political, regulatory, and financial resistance, a Bitcoin spot ETF has finally achieved what the industry has been striving for.

Somewhat poetically, this spot Bitcoin ETF has been trading for exactly 15 years since Hal Finney first tweeted “Running bitcoin” on January 11, 2009. The first Bitcoin transaction between him and Satoshi Nakamoto took place the next day, on January 12, 2009.

Multiple indicators both on-chain and in the derivatives space suggest that a significant portion of Bitcoin investors did see this as a sell on the news. The key question going forward is whether demand inflows from ETFs, anticipation of the April halving, and demand inflows from dormant investors will be enough to break through this resistance.

The ETF listing may be priced in by the market, but how long can it last?